There has been a lot of talk over the last year or so about various mortgage acceleration programs, in fact, I have talked about them since last February (2007) myself. Fueled by United First Financial’s Money Merge Account marketing through an MLM style set up, the latest fad or craze has grown dramatically, leaving one to question whether or not it truly is the best thing out there.
Personally, I have fielded hundreds of emails from the first day I posted about these products. Most were from homeowners wondering if it was the right fit for them. Every “hate” mail I received was from a UFF agent, except a few from other mortgage acceleration advocates, even though I never said the product didn’t work.Why? Because I said they were not the best solution, and they aren’t for most people. The laws of money work against them. And that is even more true today.
You see, every dollar you spend towards your mortgage is a dollar you didn’t invest. That means that while you are dumping money into your mortgage, you miss opportunities to make more money elsewhere, and there are plenty of opportunities, even in today’s environment.
Add to the fact that once your mortgage is paid off, you have nothing left. If you had been investing instead, and we’ll just say your rate of return equaled your mortgage for simplicity sake, you would still be able to pay off your mortgage at the same time, but may not want to. If you had started with a $200,000 mortgage, at the mortgage payoff point you would have nothing in investments, whereas if you had invested, you would have $200,000 working for you already. In fact, using the same rate of return, even if you were to dump all of your mortgage payment in at this time, you wouldn’t be able to catch up.
Now, as for liquidity (immediate cash accessible), you have very little, if any, using the mortgage acceleration programs, and the bank can even choose to freeze withdrawals, rendering your entire plan useless. Just read the paper and you can see this happening, even on those with plenty of equity.
Investing can provide more liquidity, which can be used to get you through a financial crisis. Just ask your self this question, which would you rather have, $100,000 in your home or $100,000 cash? Ask anyone getting laid off or facing another type of financial crisis and you will know what their answer is.
What about the flexibility you have by not paying off your mortgage as fast as possible? You have control of your money, not the bank, leaving you the ability to seize opportunities. If your money is locked in your home, you have to “qualify” to get it back out, and you can bet that is getting harder to do these days.
I could go on and on about why mortgage acceleration programs, no matter which ones you use, are not the best options out there. That being said, they are good for some. Who? Those who have very little understanding of how money works, don’t want to learn, and simply remain focused solely on having their mortgage paid off.
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Hi,
I’d better start by clarifying a couple of things – 1: I’m in the UK, not the US, and 2: I’m a property investor (landlord), and have been for many, many years. Hence the mortgages I’m used to taking out aren’t quite the same as US ones – in particular, there are next to no long-term fixed rate products available here – about the longest available is a three-year rate fix.
I’m aghast at the product you describe – for my own house I have a “flexible mortgage” – that’s to say one on which I can (and do) overpay… but with two extra features:
1: Interest is calculated daily, so overpayment (or withdrawals) take instant effect.
2: Full liquidity is guaranteed, to the extent that it comes with a cheque book and telephone banking, and I can use it as if it were a standard bank account if I want to.
I fully agree with your analysis – while I know that some people just overpay to be mortgage-free young, I use mine as a revolving credit facility – I make extra payments in when I have spare cash, but then use the “available balance” for investment. Truth be told, because my specialism is UK rental property, there’s not been much worth buying over the last couple of years, but with the market crash happening, bargains are coming round again.
Regards,
Mark
Excellent Robert ! Excellent!
Mark – Sounds like you have a good handle on your finances and since I know very little of the UK market, I am going to leave it at that. Thanks for bringing your viewpoint.
Mike – Thanks.
Robert, your spot on analysis makes the debate a no brainer.
Good. Not a shill. I was worried when i saw this in twitter.
I think that for some people, paying their mortgage off quickly makes sense, as given their appetite for risk, it is an uncomfortable proposition. That said, I think most of these programs are scams.
Robert,
I agree with most all of what you have said in this post. Many prepayment programs leave the borrower facing a choice. Do they focus on paying their home off early and give up the opportunity cost of those dollars or do they stay leveraged to the hilt and funnel all of their extra cash into other investments? Most of the individuals promoting these programs are focused solely on the acceleration of the mortgage instead of efficient equity management.
Mark, on the other hand, brings up a valid point about the way mortgages work in the UK. By having a mortgage that functions as a “revolving credit facility”, borrowers are able to efficiently manage their equity, having access to it for changing cash needs, as well as investment opportunities. The result is a shift from static obligations to a dynamic relationship between both sides of their balance sheet.
Nice post and great points. This is an endless argument and for some reason it always gets heated. One self-proclaimed “real estate guru” I talk to from time-to-time swears that these programs are great (not sure why he’s a guru?) and many others hate the programs. I think, as you said, these programs are great for some and terrible for others.
Bob – quick and easy access to cash in today’s economic environment is very important. In fact, some experts are saying consumers today should have about one year’s net income in investments that can quickly have the cash accessed.
Some of the thinking goes back to the 15 year mortgage will save thousands of dollars over the lifetime of the loan versus a 30 year mortgage. So people think saving the interest. They do not consider income tax effects.
People should think about the global aspects rather than just the cash in and cash out aspects of transactions.
Robert, great post! I’ve recently started making additional principal payment toward my mortgage. I was spurred to do this through the high volatility of the stock market as of late and thanks to having a little bit extra cash flow. There are so many pros and cons of each option, I’d love to hear some more of your comments on each.
I have been reviewing this topic for the past few months and have found over 10 companies that sell a mortgage acceleration software program ranging in the price from $200 to $3500. I am biased towards the programs and feel they are worthwhile to look into for someone whose goals is to get out of debt more quickly.
I have a Roth IRA, retirement plan with my work, put money away for my kids college education, and save money for a rainy day. Recently I have decided that my primary focus is to get out of debt as soon as possible. I am a little more hesitant these days to investment my discretionary income into investments with the way the economy is right now. I can be out of debt in 6 years by following a mortgage acceleration program. That is very appealing with the way the economy is right now.
@Toby – you should try to determine interest being charged versus interest being paid and get rid of the debts with a higher interest rate than you are earning.
Very good thread.
What people here understand clearly is that using a equity line in second position does not provide enough (if any) liquidity to be the best form of acceleration. It does enable those with low risk tolerance a way to get out of debt quicker which is typically the motive of such a person. However, as Mark Harrison suggests, there are products,even here in the USA, that will provide full liquidity and are not an arm and a leg. While I totally agree there are many better places to earn a higher rate of return than by offsetting the low rates we have now, an equity line in 1st position provides an excellent holding account until such opportunities arise. It really comes down to risk tolerance and financial objectives. That varies so greatly that no 1 solution is right for everyone.
You have a number of comments and I don’t wish to be one of “those” UFirst agents so I will simply say: “Canceling Interest is the same as Earning Interest.” Every dollar of interest canceled is a dollar that stays in your pocket. Plus, not a great time for investing I wouldn’t think. Thanks very much.
Sorry, forgot to subscribe. Thanks
Bill,
You claim to not want to be “one of those UFirst Agents”, yet you are. Here is your the typical Money Merge Account argument I hear these days…
“I will simply say: “Canceling Interest is the same as Earning Interest.” Every dollar of interest canceled is a dollar that stays in your pocket. Plus, not a great time for investing I wouldn’t think.”
Wrong thinking, folks. Investing and paying off your mortgage are not the same and never can be. Rather than write a lengthy reply as to why, check out this post I did a short time ago over at Florida Mortgage Report (click link above) and read Money Merge Accounts: More Misleading Information dated May 10, 2009.
Also, anytime is a good time to be investing, the only thing that changes is what you invest in. If you do your research, you can far exceed what your mortgage costs, hands down.
Oh, Bill, and if you didn’t want to be one of those UFF agents, why did you comment on this with a link directly to your UFF website?
Not seeing many benefits here.